Ultralife Corporation

Good day and welcome to this Ultralife Corporation second quarter 2022 earnings release conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Jody Berfning. Please go ahead. Thank you, Bettina, and good morning, everyone.

Thank you for joining us this morning for the Ultralife Corporation's earnings conference call for the second quarter of fiscal 2022. With us on today's call are Mike Popolek, Ultralife's President and CEO, and Phil Fein, Ultralife's Chief Financial Officer. The earnings press release was issued earlier this morning. And if anyone has not yet received a copy, I invite you to visit the company's website, www.ultralifecorps.com, where you'll find the release under investor news in the investor relations section. Before turning the call over to management, I would like to remind everyone Some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. Potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19 and related supply chain disruptions, potential reductions in revenues from key customers, acceptance of our new products on a global basis, and uncertain global economic conditions. The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these and other factors that could affect Ultralife's financial results is included in the company's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful that differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.

Good morning, Jody, and thank you, everyone, for joining the call. Today, I'll start by making some brief overall comments about our Q2 2022 operating performance after which I'll turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I'll provide a brief update on the progress against our 2022 revenue initiatives, then open it up for questions. For the second quarter of 2022, driven by strong shipments to commercial and markets, we delivered a 20% year-over-year sales increase and $0.03 of earnings per share. double-digit increases in organic medical and industrial market sales, and strong single-digit increases in core oil and gas sales aided by revenues from the new acquisition more than offset delayed shipments against government defense existing orders in both our business segments due to persistent supply chain constraints. In Q2, we were pleased to swing back to profitability from the last few quarters due to increased revenues and controlling operating expenses, and despite continued inflationary cost pressures and manufacturing inefficiencies associated with supply chain disruptions, which pressured gross margins. We also assertively managed working capital, including inventory, by working closely with our suppliers and customers in an effort to position ourselves to the best extent possible for mitigating the impact of long lead time raw materials and components on the timely manufacturing of our products and delivery to our customers. In a few minutes, I'll give you further updates on our revenue initiatives, but first I'd like to ask Ultralight CFO, Phil Fain, to take you through additional details of the second quarter 2022 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our second quarter results for the quarter end of June 30th, 2022. We also filed our form 10Q with the SEC and have updated our investor presentation, which you can find in the investor relations section of our website. Consolidated revenues for the 2022 second quarter totaled $32.1 million compared to $26.8 million reported for the second quarter of 2021, an increase of 20%. Commercial sales increased 54.1%, reflecting solid growth across virtually all commercial end markets, including medical, industrial, and oil and gas. Government defense sales declined 30.8%, due primarily to continued supply chain disruptions, including increased lead times on components from suppliers, impacting both our internal and customer manufacturing delivery schedules, resulting in delays in our shipments to future periods. On a sequential basis, second quarter sales increased 5.8 percent, with battery and energy products and communication systems sales increasing 3.4 percent and 62.4 percent, respectively. The notable quarter-over-quarter increase for communication systems primarily resulted from the availability of components to partially fulfill an order placed in 2021 and the timing of orders for which inventory was on hand. Revenues from our battery and energy product segment were $30.1 million compared to $22.9 million last year, an increase of 31.8%. With $6.6 million of the $7.3 million variance attributable to Excel and 0.7 million of net organic growth, comprised of a 2.1 million increase in commercial sales, partially offset by a 1.4 million decrease in government defense sales. The increase in commercial sales, excluding Excel, consisted of a 1.1 million increase in medical battery sales, a 0.7 million increase in industrial and market sales, and a $0.3 million increase in Suez oil and gas market sales. The sales split between commercial and government defense for our battery business was $82.18 compared to $70.30 for the 2021 second quarter, and the domestic to international split was $47.53 compared to $52.48 last year, accentuating both. the continued success of our global revenue diversification strategy, and the delays in U.S. government defense sales. The $24.7 million of commercial sales for the second quarter was the highest for any quarter in the company's history. Revenues from our communications system segment were $2.0 million compared to $3.9 million last year, a decrease of 49%. reflecting shipments delayed to future periods due to increased lead times on components from suppliers and the timing of orders placed by our customers. We have identified eight sales opportunities which were pushed out to future periods by our customers and eight opportunities which we did not have the components on hand to ship in the second quarter with a combined total exceeding $4 million. On a consolidated basis, the commercial to government defense sales split was 77-23 versus 60-40 for the year earlier quarter. Our consolidated gross profit was $7.6 million for the 2022 second quarter, up 9.7% over the 2021 period. As a percentage of total revenues, consolidated gross margin was 23.8%, versus 27.1% for last year's second quarter. Gross profit for our battery and energy products business was 7.2 million compared to 6.0 million last year. Gross margin was 23.7%, a decrease of 260 basis points from 26.3% reported last year, primarily reflecting raw material and component cost inflation ahead of customer price realization and manufacturing inefficiencies associated with supply chain disruptions. For our communication system segment, gross profit was 0.5 million compared to 1.2 million for the year earlier period. Gross margin was 24.9% compared to 32.1% last year, reflecting lower volume resulting in the underabsorption of factory costs caused by delays in component deliveries in the timing of orders. Operating expenses were $6.9 million compared to $6.2 million last year, an increase of $0.7 million, or 11%. The increase was fully attributable to the addition of Excel. Excluding Excel, operating expenses decreased $0.4 million, or 6.6%, primarily reflecting the timing of new product development spending. As a percentage of revenues, operating expenses were 21.3% compared to 23.1% for last year's second quarter. Operating income was 0.8 million compared to 1.1 million for the 2021 quarter. On a sequential basis, second quarter operating income increased 1.1 million. Our tax provision for the second quarter was 0.2 million, the same as the year earlier quarter, computed on a GAAP basis, including the impact of interest expense to help finance the Excel acquisition. Net income was $0.5 million or $0.03 per share. This compares to net income of $0.8 million or $0.05 per share on a diluted basis for the 2021 quarter. Similar to the first quarter, Excel was once again accretive. Adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, was $2.2 million for both the current and prior year quarters, representing 6.8% and 8.2% of sales, respectively. Turning to our solid balance sheet, to proactively manage our supply chain, reduce the impact of potential component price increases, and optimize our position to service our substantial backlog, we increased inventory by 2.8 million or 7.8% over the first quarter. This represents an increase of 6 million or 18.1% over year end 2021. We ended the 2022 second quarter with working capital of 49.6 million in a current ratio of 3.2 compared to 47.6 million in 3.5 for year end 2021. Debt to capital at quarter end remained low at approximately 0.15. As a result, we remain well positioned to fund organic growth initiatives, including new product development and strategic capital expenditures, while continuing our focus on expediting organic growth through accretive M&A. Going forward, with our backlog, liquidity, diversified end markets, and growth initiatives, we remain steadfastly focused on realizing the full leverage potential of our business model. I will now turn it back to Mike. Thank you, Phil.

For the second quarter of 2022, we continue to drive our revenue growth strategy, which is based on market and sales reach expansion, primarily through diversification, new product development, and when appropriate, with strategic CapEx for achieving competitive advantage, and a disciplined approach to acquisitions to quickly gain scale, additional skilled resources, market access, technology, and new products. For the battery energy products business, market and sales reach expansion and diversification is about penetrating the global commercial markets as well as the international government defense markets to help mitigate the lumpiness and cyclicality associated with our historical concentration in the U.S. government defense market. In the second quarter, despite a 21% decline in sales to the U.S. government defense end market, our commercial end market revenues increases fully offset the government defense decline, leading to 3% of net B&E organic revenue growth. In Q2, and including the new acquisition, the total commercial and international government defense revenues represent approximately 84% of our total B&E sales. As for the acquisition, Excel was again EPS accretive in Q2 with revenues exceeding expectations, its second total quarter as part of the Ultralight portfolio. Excel is bringing additional diversification and scale to our battery and energy products business. And while we continue to integrate operations and business cadences, best practice sharing has begun, further leveraging the talented and valuable resources gained in the acquisition. Drilling down further into our second quarter commercial revenues, overall global B&E medical revenue represented approximately 26% of total battery energy product sales. Demand from current customers was for applications such as ventilators, respirators, infusion pumps, digital x-ray, and surgical robots. Due to oil and gas and subsea electrification commercial revenue was approximately 32% of total B&E sales. High oil and gas prices and increasing rig counts continue to favorably impact demand in our oil and gas end markets. And finally, B&E's Q2 U.S. government defense business represented approximately 16% of total B&E product sales, consisting primarily of radial battery and chargers to OEM primes. Regarding the conformal wearable battery, U.S. Army IDIQ contract announced last May with a value not to exceed of up to $168 million during the three-year base award period, the product development process and component testing is moving forward. First article testing is expected to begin later this year, demonstrating full compliance with contractual product specifications and program requirements. As an IDIQ contract, actual delivery orders, including quantities and timing, are at the discretion of the DoD. A core element of B&E's organic growth strategy remains new product development. And during the second quarter, we continued to advance several of our products under development over the last few years. One such product is the new X5 medical cart battery system, where OEM customer interest remains high, leading to more demonstrations throughout Q2 and more positive customer feedback. As for the initial $2 million order discussed last quarter, we expect to start shipping in Q3 and continued through the early part of 2023. Other new product development projects currently underway include but not limited to a higher capacity smart U1 battery, new 5790 and XR1238 CFX blend primary batteries, OEM public safety radio batteries, and next generation ruggedized modular large format energy storage batteries. New product development and multi-generational product planning keep us current with market needs, and give us the opportunity to remain close with and provide value to our key customers. Regarding efforts to strengthen competitive differentiation, we also continue to invest in strategic capex in our facilities. Progress continues at our Newark, New York facility on the new lithium manganese dioxide primary three-volt cell manufacturing line. Having already passed UN testing, the cells are currently undergoing UL and IUC testing. This premium product outperforms at high rate discharge, which is favorable for lighting and medical applications, and will be one of the few domestically manufactured cells of its form factor. Production will continue to ramp up through the end of the year following the UL and IEC testing. At our China facility, our project to upgrade our thionchloride primary ER cells and manufacturing processes continues to move forward. Several customers are in various stages of testing and commercial activity, driving an increase in production. In Q2, ER cell revenue is up 64% year-over-year. We are currently sampling a new 19-amp-hour low-rate cell to OEMs, specifically targeting long-life metering applications. With each stage of product and process improvements and newly identified thionylchloride ER cell commercial and industrial applications, we are expanding our available opportunity sets. We also manufacture our thin-cell and 9-volt products in China, and we continue to add to our value proposition with global medical and industrial customers for the supply of our cells and battery pack solutions. In Q2, our total China operations revenue was up 21% year over year. Looking at a communication systems business, in Q2, new product development revenue for products less than or equal to three years old represented approximately 48% of communication systems revenue. For the U.S. Army's handheld man-packed small form fit and leader radio programs, after some supply chain delays, in the second quarter of 2022, we began shipping against the October 2021 announced $4.2 million vehicle amplifier adapters award and anticipate making the remainder of the shipments throughout the end of this year. We are also initiating supply chain actions to support the just recently awarded $4.6 million vehicle amplifier adapter order for deliveries to start in late 2022, early 2023. The VAA contracts over the last several years, combined with the recent new awards, demonstrate the effectiveness of this product line in supporting the critical missions of our ground forces and the confidence our customers have and our capability of integrated sophisticated electronics for harsh environments. New product development activities for defense and commercial applications continue, with several OEM partners addressing various emerging requirements for integrated systems. One such opportunity is for a bespoke power solution supporting radio integration into military aircraft, which is moved to form, fit, and function qualification trials by the customer on various rotary wing platforms. Procurement of production units could take place over several years, starting in fiscal year 2023. Another product is an edge server system integration, which has moved to production with over 211 units delivered to date. This solution provides greatly increased capability with a smaller form factor compared to currently fielded systems, estimating a 50% reduction in cube and weight. Ultralight provides the case systems and integration to enable this leading-edge compute capability to be deployed into harsh military environments. This configuration is a 2K system, with one housing the server, the other providing uninterruptible power supply backup with ancillary items. Low-rate initial production awards are continuing, with program follow-on awards expected later in 2022 and into 2023. A new development effort port edge solution variant has also moved to early prototype stage. We are very excited about this new capability, which will provide enterprise class edge computing capability on dismounted operators for both military and commercial applications. A capability demonstration was completed at the Special Operation Forces Industry Conference in May, which highlighted the art of the possible when enterprise class compute capability is employed onto an individual. Expertizations are that we will field, excuse me, expectations are that we will field operational prototypes later in 2022. Regarding our communication systems teams previously mentioned push into commercial markets, the initial low rate production units of a mobile data cart delivered in 2021 remain in operational testing with the customer, collecting and transporting autonomous vehicle data to their engineering facilities. Another commercial product is a virtualized radio access network enclosure, supporting 5G network deployments worldwide. Initial units were delivered to a customer and are now supporting test and evaluation by multiple cellular network providers in two different countries for use in expanding 5G market installation. Dialogue around installation support continues as we interface with cellular providers to assist with their system evaluations. Supply chain challenges specific to electronic components continue to impact estimating delivery schedules. in a continued area of engagement by communication systems management and supply chain professionals. Communication systems ongoing capture defense program awards, improvement in defense core business bookings, combined with diversification in the commercial markets on multiple fronts, provides a path to improve revenue continuity and for long-term sustainable growth. In closing, For the second quarter of 2022, we were pleased to achieve solid year-over-year revenue growth, the return to profitability, and revenue and earnings gains quarter to quarter. While we anticipate continuing to battle supply chain and inflationary challenges in the second half of the year, we remain committed to advancing our new product development initiatives, transitioning new products to production, and generating profitable growth for the year. We are keenly focused on the realization of numerous transformational projects to deliver new meaningful, sustainable, annual revenue streams in attractive growth markets from new, competitively differentiated products. In our government defense markets, these include, but are not limited to, multiple DoD IDIQ awards in various stages of maturity, including the 5368, 5390, 5790 CFX, and conformal wearable batteries, full-rate production follow-on leader radio VAA contracts, and new OEM MANPAC radio ancillaries. In our commercial end markets, these include the new medical cart batteries, the new CR and ER cells, new public safety thin-cell medical and subsea electrification battery packs, and several of our new communication systems, integrated computing, 5G, and AI commercial solutions. Our capabilities and the mission critical end markets we serve, military defense, energy and medical, align well with current world events and needs. Our strong balance sheet, solid cash flow from operations, and disciplined execution of our business model afford us the opportunity to simultaneously pursue organic revenue growth through our transformational projects, invest in new product development and strategic CapEx for competitive advantage, and seek out impactful acquisitions, all with the aim of growing the business with profitable revenues each and every year. Operator, this concludes my prepared remarks, and we'd be happy to open the call for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question over the telephone, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask questions. We will pause for just a moment to allow everyone an opportunity to signal for questions. Our first question today comes from Barry Lewis of Sandler Capital Management. Please go ahead.

Hi, guys. The last conference call, I asked a question regarding the May 2021 press release from the government. And you talked about that today. And I want to make something clear. You expect that order in the second half of 2022 or do you think it'll come in the third quarter or 2023?

Hi Barry, this is Mike Poplik. The press release in May was for the conformal wearable battery program, which was an IDIQ, which at the time had awarded to four different potential manufacturers, sort of a place in the game for the conformal wearable battery. Each of us is now very actively involved in the development of the battery solution in preparation for first article testing, which in my prepared remarks we said we start in really the back half of this year. Upon completion of the first article testing and demonstration that we meet the program requirements and specifications, then we would be in a position to receive delivery orders from the U.S. Army. Given as an IDIQ contract, there's no guarantees that you get any or that you get, you know, what proportion you would get. But we're working diligently to ensure that we're one of the players that successfully passed all the first article tests so that we'd be in a position when the government decided to place orders to receive some of those initial delivery orders. But at this time, it really is dependent upon the completion of the first article testing to try to determine what would be the timing of potential delivery orders going forward. So there's no firm delivery order of any large quantity until after we get through that first article testing process. And that first article testing process is expected to be initiated and completed in the second half of the year.

Thank you very much.

Ladies and gentlemen, as a reminder, to ask a question over the telephone, please press star 1 on your telephone keypad. It appears that we have no further questions at this time. I would now like to turn the call back over to Mike Publish for any additional remarks.

Great. Okay. Well, thank you once again for joining us for our second quarter 2022 earnings call. We look forward to sharing with you our quarterly progress on each of these calls in the future. As Phil mentioned, I'd also like to mention that we had updated our investment presentation on the website, so please check it out. Thank you, everybody, and have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.